Well, I am nipping at Krugman’s heels on this one, but I’m out of free articles for the month and I refuse to subscribe to the New York Times. I will show you guys what I’ve gotten so far, and maybe some of you can carry it over the finish line.

These past few years have been lean times in many respects — but they’ve been boom years for agonizingly dumb, pound-your-head-on-the-table economic fallacies. The latest fad — illustrated by this piece in today’s WSJ — is that expansionary monetary policy is a giveaway to banks and plutocrats generally. Indeed, that WSJ screed actually claims that the whole 1 versus 99 thing should really be about reining in or maybe abolishing the Fed….

What’s wrong with the idea that running the printing presses is a giveaway to plutocrats? Let me count the ways.

First…the actual politics is utterly the reverse of what’s being claimed. Quantitative easing isn’t being imposed on an unwitting populace by financiers and rentiers; it’s being undertaken, to the extent that it is, over howls of protest from the financial industry. I mean, where are the editorials in the WSJ demanding that the Fed raise its inflation target?

Beyond that, let’s talk about the economics.

The naive (or deliberately misleading) version of Fed policy is the claim that Ben Bernanke is “giving money” to the banks. What it actually does, of course, is buy stuff, usually short-term government debt but nowadays sometimes other stuff. It’s not a gift.

To claim that it’s effectively a gift you have to claim that the prices the Fed is paying are artificially high, or equivalently that interest rates are being pushed artificially low. And you do in fact see assertions to that effect all the time. But if you think about it for even a minute, that claim is truly bizarre.

OK, I found Krugman’s statements to be “truly bizarre,” because I’m almost positive he’s written several times on the audacity of the plutocrats whining about their situation, when they were rescued from their own bad decisions by the government. I’ve found two examples so far:

Mark Thoma has the rundown of informed reactions. A bailout was necessary — but this bailout is an outrage: a lousy deal for the taxpayers, no accountability for management, and just to make things perfect, quite possibly inadequate, so that Citi will be back for more.

Now what? We have already, in effect, recreated New Deal-type guarantees: as the financial system plunged into crisis, the government stepped in to rescue troubled financial companies, so as to avoid a complete collapse. And you should bear in mind that the biggest bailouts took place under a conservative Republican administration, which claimed to believe deeply in free markets. There’s every reason to believe that this will be the rule from now on: when push comes to shove, no matter who is in power, the financial sector will be bailed out. In effect, debts of shadow banks, like deposits at conventional banks, now have a government guarantee.

The only question now is whether the financial industry will pay a price for this privilege, whether Wall Street will be obliged to behave responsibly in return for government backing. And who could be against that?

So at this point, I see only two possible legs Krugman has to stand on:

(A) He could say that in the earlier pieces he was referring solely to TARP, and that the Fed had absolutely nothing to do with rescuing Wall Street firms. That is crazy, but I’m wondering if we can go further: Can someone find Krugman himself explicitly saying that the Fed rescued Wall Street?

(B) He could clarify that in his latest post, he is distinguishing the extraordinary Fed lending programs (TAF etc.) from generic quantitative easing. Maybe he wants to say that the current Fed critics at the WSJ and elsewhere aren’t being very nuanced, and that they are wrong for thinking that the Fed’s purchases of Treasuries per se help the banks, when really it’s all these other things that the Fed does that admittedly help the banks…

In any event, I am calling this a Krugman Kontradiction. Some may disagree with me, but remember I am, by definition, the judge of what is a Krugman Kontradiction. The only remaining question in my mind is to see if we can upgrade this to an actual contradiction by finding him explicitly saying the Fed bailed out Wall Street.

It appears there might be another leg (C). It was the taxpayers who bailed out Wall Street (not the Fed).

“…Is it better when exquisitely tailored bankers whose gambles brought the world economy to its knees — and who were bailed out by taxpayers — whine that President Obama is saying slightly mean things about them?

That whole Krugman post is weird. I could understand him arguing that expansionary monetary policy is necessary to benefit the economy as a whole and that it’s therefore misguided to talk about its effect on one part of the segment of the economy relative to another. That is very debatable but is at least a somewhat plausible position. Krugman, though, is so hepped up on people power that he wont acknowledge that those evil bankers see any benefit from it all. By the end of the post he is describing them as “victims” of expansionary monetary policy.

Just think about what you have to believe to accept that. You have to believe that the way to ensure easy access to credit is to weaken creditors. You have to believe that financial institutions do not want to have the fed buy assets that they are selling. You have to believe, if you think that inflation will get the economy back on track, that banks are harmed by economic prosperity. It’s just nuts to argue that the banks helped establish an organisation to reign in the interests of the banks.

Teqzilla wrote: You have to believe, if you think that inflation will get the economy back on track, that banks are harmed by economic prosperity.

Yeah, great point. I actually was going to do down that path myself; Krugman recently wrote something that tweaked the Communist Manifesto (honest!) and talked about how everything the Republicans were trying to do would hurt all human beings (like opposition to deficits, carbon taxes, etc. and I think it included inflation). And Krugman concluded by saying something like (paraphrasing), “People the right, unite! You have nothing to lose except, well, everything.”

I.e. Krugman was saying that the right-wingers weren’t even putting their own interests above those of everybody else; he was saying their policies were so stupid, and Krugman’s policies were so good, that it was simply a matter of what hurts everyone vs. what helps everyone.

Thus, if he included “expansionary monetary policy” in that list of policies–which I think he did–then this present post is officially a Contradiction.

Aww too bad Teqzilla. Here’s the Krugman post I had in mind. He just says that “rich cranks” are hurting themselves with their own crackpot ideas, and he includes a depressed economy in that list, but he doesn’t explicitly say expansionary monetary policy. It’s only a contradiction if you allow me to invoke Modus Ponens, but we strive for a higher standard at Free Advice before convicting a blogger of contradiction.

When Krugman argues that the Fed’s expansionary monetary policy “hurts” the banks or wasnt received well by Wall St, he’s referring to the fact that the Treasury yield curve has been significantly flattened. This reduces the profitability for banks who borrow short and sell long.

What he doesnt mention, however, is that the flattening of the yield curve wasnt due to expansionary moneary policy at all; it was the result of Operation Twist which was balance sheet-neutral. In fact, the combination of QE1 + QE2 generated perhaps the steepest yield curve…..ever.

So either Krugman mistook Operation Twist to be “expansionary” or he ignored the fact that the Fed gave the big banks an opportunity of a lifetime with the steepest yield curve anyone can remember before “reigning” them in with a slap on the wrist.

With Bernanke in charge in particular, we have got to remember that we’ve got a Fed that recognizes that we’re not in a monetarist world where only monetary policy matters – the banking system itself matters too. This is Bernanke’s whole research agenda vis-a-vis the Depression. So two policies: expansionary monetary policy, and banking sector policy.

The former is clearly what he’s talking about in this article and I think he’s right that it’s not clear at all that this benefits the “plutocrats”. The policy to rescue that banks is clearly what’s at issue in the blog posts, and obviously that’s something that can be done in a way that greatly benefits the bankers or in a way that doesn’t benefit them. And I think Krugman’s always been a steady proponent of keeping the banking system intact in a way that doesn’t let the bankers themselves get away with murder.

Daniel wrote: The former is clearly what he’s talking about in this article and I think he’s right that it’s not clear at all that this benefits the “plutocrats”.

Well OK, but then Krugman spares himself a contradiction only by misrepresenting what the WSj op ed said. Have you skimmed it? The guy is explicitly citing Mises and Rothbard on Cantillon effects, and explicitly says he’s talking about the Fed injecting capital into the biggest banks by overpaying for their assets.

Then Krugman translates this narrowly into “expansionary monetary policy” as opposed to “helping the banks,” and concludes that the guy is nuts.

The guy never makes that distinction. He refers to “credit expansion,” which (from the Austrian POV) includes both things.

I am feeling conciliatory so I’m prepared to admit that Krugman honestly had no idea he was misrepresenting the guy. I.e. I believe Krugman really has very little understanding of the Austrian view of the Fed, ever since his response to me when he said (paraphrasing), “How can guys like Murphy explain the academic studies showing that the Fed can influence the business cycle?”

I mean, what is the un-artificial, or if you prefer, “natural” rate of interest? As it turns out, there is actually a standard definition of the natural rate of interest, coming from Wicksell, and it’s basically defined on a PPE basis (that’s for proof of the pudding is in the eating). Roughly, the natural rate of interest is the rate that would lead to stable inflation at more or less full employment.

So he just defines “natural” as something that can only come as a result of top-down interference in the market, and uses this to justify the reason why top-down market controls are necessary. The same guy accusing other people of giving us “George Orwell’s world”, delivers a completely inside out white-is-black definition of what is “natural”.

Let’s just make this really simple, if the Fed had not purchased approx 60% of government debt last year, would the interest rate that the US government can borrow at be [A] higher or [B] lower or [C] same? Can Krugman can answer just that question?

Beyond that, if the QE does not artificially manipulate the interest rate, then what is it doing anyhow?

Krugman: To claim that it’s effectively a gift you have to claim that the prices the Fed is paying are artificially high, or equivalently that interest rates are being pushed artificially low. And you do in fact see assertions to that effect all the time. But if you think about it for even a minute, that claim is truly bizarre.

It’s truly bizarre to think that if the Fed didn’t buy 61% of all Treasuries issued in 2011, that interest rates would have been even LOWER for the Treasury?

Krugman is beyond retarded.

It’s truly bizarre to believe that prices of goods/securities would be the same with or without monetary inflation. By his logic, we’d have to believe that the prices that exist in 2012 could have existed in 1912, if only people spent their money rather than hoarding it.

Watoosh, forgive me, but I just woke up from a nap. Yes, that is exactly what Krugman is doing, but why is it circular? Are you saying his second point relies on an assumption that the first point is false, so he’s not doing much besides saying, “These guys are liars, because, well, we all know they are liars”?

Krugman is playing into the liberal dual assumption that A) libertarian ideas are nothing more than ideological weapons for the rich and powerful* (and consequently, to the detriment of the poor and powerless), and that B) any professed support for libertarian ideas by CEOs, lobbyists etc. must be sincere. He seems to be implying “Well of course WSJ would speak against the Fed – they’re all bankers anyway, and we all know that bankers hate the Fed!”

Perhaps it’s a slight mischaracterization to call this a circular argument, although it seems that way to me – if he can show that bankers are in fact generally against QE, then it’s not a fallacious argument, but it seems he is just flat out assuming it. He is certainly using an appeal to motive, though.

*Meaning, of course, that any libertarian/conservative economist is practically part of the financial industry. When Ron Paul advocates free banking and competing currencies, it’s really the voice of Lloyd Blankfein coming through his mouth, but when Larry Summers has a Keynesian thought, it’s because his small heart grew three sizes that day.

Why are your escape hatches in your Krugman Kontradictions always exactly the very points of what Krugman is saying? It’s so clear to me, but you make it sound as if they’re hidden and no one would have picked it up.

Well for one thing, DJ, because Krugman morphed what the WSJ writer’s position was. The guy was saying the Fed is bailing out the big banks, then Krugman says, “This guy is an idiot! Expansionary Fed policy isn’t bailing out the banks.” So if Krugman means to append, “…it was the other stuff the Fed did–which the WSJ writer has in mind too–that bailed out the banks,” then that is indeed slippery.

And if Krugman just means, “Fed had nothing to do with it, it was TARP,” you’re right, that’s not slippery, it’s just false.

Since you are clear on what Krugman is saying, tell me: Is he saying it was just TARP and not the Fed (false), or is he saying yes Fed bailed out the banks, but not via expansionary monetary policy (possibly true but very slippery)?